How To Buy Stock In

Your guide to investing for the future

19 February 2019

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How to grow your hard-earned cash the smart way.

You work hard for your money. And investing can help your money work hard for you by generating income and growing in value.

The goal of investing is simple: build wealth so you can use it later in life or pass it on to the next generation. But while you have countless ways to invest, each comes with a degree of uncertainty.

Key ingredients of investing

When planning where to put your money, consider the four major factors that affect investments:

Savings. The first step to investing is learning to live within your means to build reserves. Start by recording your assets, your debts and liabilities and everything your family spends, and adjust your budget accordingly.

Goals. Maybe you want to save for a home, a higher education or travel. Perhaps you’re looking to set up for a comfortable retirement or pass on a financial legacy to your kids or grandkids. Your goals will guide your investment choices.

Time. Most investments rely on the power of compounding interest, which is additional interest paid on your principal deposit. In other words, it’s interest paid on interest. And it helps to speed up your earnings.

Vehicles. You have many ways to put your money to work — CDs, stocks, annuities and more. Factor in the risks and rewards for each.

The benefits of investing

With investing, the idea is to use your money to make more money. By creating and preserving your wealth, you can reap the rewards of:

Return on investment. Many investments increase in value over time. Investments aren’t always guaranteed, but profit projections can help you decide what to invest in and how much to invest.

Dividends. If you purchase stocks, funds or cash-value life insurance, you own shares in that company and may receive a percentage of its profits — which you can either cash in or reinvest. These dividends are distributed to shareholders on a set schedule. Stocks and funds typically pay quarterly dividends, while mutually owned life insurance companies tend to pay annual dividends, sometimes called a return of excess premium.

Compounded interest. Many investments give you the opportunity to earn compound interest, which is essentially interest on your earnings. The longer you hold a stock, the higher its value — and the more interest you’ll earn.

Voice in how a company operates. When you own shares in a company or corporation, you get to vote or have a say in how it’s run.

The risks of investing

No investment is risk-free, so a big part of investing is deciding how much risk you can comfortably assume. Generally, the higher the risk, the higher the reward.

Risks investors face include:

Losses. The value of investments can decrease for many reasons. Companies can underperform, demand for products or services can dry up and the stock market can crash. To earn an ROI on loans, stock and annuities, the company you invest in must stay in business. If it goes bankrupt and liquidates its assets, that affects how much money you get back — if any.

Volatility. The value of an investment can fluctuate, sometimes wildly, due to internal factors like faulty products or external events they have no control over, like political changes.

Inflation. When goods and services cost more in the future than they do now, your money becomes worth a little less, and if you don’t grow your money at a rate higher than the rate of inflation, you’ll essentially be losing money on your investments.

Fees. Most investment categories come with a set of fees. For example, brokers charge commissions or management fees to carry out the purchase of stocks and bonds. Weigh the fees against your potential ROI.

Taxes. Likewise, capital gains from investing are often subject to taxes. The timing of the collection of those taxes depends on the investment. Most investments are taxed on their sale, but retirement investments can be taxed on withdrawal from the account.

Are any investments guaranteed?

No. But a few protections are in place for specific vehicles and situations:

The National Credit Union Administration insures credit union members’ deposits. Backed by the US government, it also insures up to a maximum of $250,000 of your money.

The securities you own aren’t insured against a loss in value. But the Securities Investors Protection Corporation is a non-government entity that replaces missing stocks and securities in customer accounts held by a SIPC member firm if the firm fails. The limit is $500,000, including up to $250,000 in cash.

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What to invest in

You’ll find various ways to invest your money to achieve specific financial goals. Investments are grouped into categories by type — for example, bank products and bonds — each with its own features, risks and rewards.

Cash equivalents

You can stash your cash in a bank account, but other ways can make better use of your cash and earn interest or tangible assets.

These debt securities are issued and backed by the US Department of the Treasury to help pay for the federal government’s borrowing needs.

MMAs can take your savings to the next level by offering the convenience and liquidity of a high-interest savings account, sometimes with checkwriting privileges, but often in exchange for higher initial deposit and balance requirements.

Look to a CD for an insured savings account that holds a set amount of money for a fixed term, usually six months to five years. The issuing bank pays interest until the CD matures. You can cash in your CD for the principal plus the interest you earned or roll over your balance to a new CD.

Also known as qualified tuition plans, 529s are savings plans sponsored by states, state agencies or educational institutions. Earnings grow tax-deferred and withdrawals are tax-free when used for qualified education expenses, such as tuition and board.

Permanent life insurance policies — like whole, universal and variable life insurance — are investment products that build value over time. They include a cash component that’s invested into a menu of options, usually mutual funds. When you die, your beneficiaries receive a death benefit plus any added cash value.

Think of an annuity as a contract between you and an insurance company. The company promises to pay you regularly either right away — called an immediate annuity — or as a future deferred annuity. Annuities grow tax-deferred, and you won’t pay taxes on the income and investment gains until you withdraw the money. Many people buy fixed, variable or indexed annuities to help manage money in retirement.

Investors often buy precious metals like gold, silver and platinum to diversify their portfolios and protect themselves from inflation and financial instability. Precious metals have intrinsic value, so they’re not susceptible to inflation simply because you can’t print more of them. Because they’re separate from assets like stocks and bonds and carry no credit risk, they’re a less volatile investment.

Types of stocks

When you buy stocks, you’re buying a share of ownership in a company. Also called equities, stocks are based on the company type, size, potential for growth and performance in the market.Your profits and losses depend on the success and failure of the company, as well as the influence of major trends in the stock market.

These pay regular dividends based on the company’s current or retained earnings. For investors, they provide high-yield income that’s often paid out quarterly. Big-name utility companies tend to be income stocks.

These are stocks of companies growing at a faster rate than the market average, such as tech startups. They rarely pay dividends. Instead, investors purchase them because they believe their capital will appreciate.

These are shares of companies with lower price-to-earnings (PE) ratios than their peers, so they’re often cheaper than stocks with a higher PE. They can be growth or income stocks, and people buy them hoping the stock price will rebound and return to a more competitive PE.

These are shares in huge, financially fit corporations with a solid history of growth, and they usually pay dividends. Examples of blue-chip stocks are General Electric, Visa and Walmart.

MLPs are publicly traded companies organized as limited partnerships. They combine the benefits of having profits taxed only when investors receive distributions with the liquidity of a public company.

As the name suggests, these are small shares of public companies that trade for less than $1. They’re known for their volatility.

Impact stocks are shares in companies that are known for their environmental and social stewardship. Companies specializing in solar energy, low-income housing and sustainable agriculture are examples of impact stocks.

Types of funds

An investment fund collects capital from a bunch of investors to buy stocks, bonds and securities. Usually managed by professionals, they give investors access to opportunities they may not have been able to invest in on their own.

These funds pool money from investors to invest in a variety of securities, such as stocks and bonds. Investors buy shares in mutual funds, and each share represents their part ownership in the fund and the income it generates. Four major categories are money market funds, bond funds, stock funds and target date funds.

Open to accredited investors like insurance companies, universities, and high-net-worth individuals, these funds require a high initial investment. They’re managed by private equity firms that typically buy a controlling interest in the portfolio company and work to increase its value over the span of 10 or so years. While most private equity funds have a long-term focus, some specialize in minority investments in startups and fast-growing companies.

Also limited to uber-wealthy and institutional investors, hedge funds pool money to invest in a range of investments. However, they tend to take a riskier approach than mutual funds.

An index fund is a type of mutual fund or EFT with a portfolio that’s made to match or track the returns of a market index, such as the S&P 500. It’s an indirect investment option that’s known for its low operating expenses and turnover.

Types of options

Options are contracts that give the investor the right — but not the obligation — to buy or sell a security, such as a stock or foreign currency, at a fixed price within a specified time.They’re derivative, which means they derive their value from their underlying assets. Options are open to both institutional and individual investors.

These contracts give the buyer the right to buy shares of an underlying stock within a specified timeframe. The seller must sell those shares to the buyer, who exercises the option to buy on or before the expiration date.

These give the buyer the right to sell shares of an underlying stock on or before the expiration date, and the seller must oblige.

These short-term financial tools are based on a yes/no question. Like call and put options, they have an expiration date. At that time, the price of the asset must be on the correct side of the strike price to make a profit. In other words, the payoff is either a fixed cash amount or asset — or nothing at all.

Types of real estate

Buying a home is among our major investments. But other investment options make up the real estate realm.

This involves buying and operating a real estate property, such as a house or apartment building, so that you can collect the rent. Many investors go with this investment for its cashflow income.

REITs allow you to invest in large-scale, income-generating real estate, such as shopping malls, hotels, resorts and storage facilities. As the investor, you earn a share of the income that’s produced. Many REITs are registered with the SEC or publicly traded.

Investors who want to hold a tangible asset can purchase ownership tree farms, managed natural forests and similar investments.

New fintech innovations that allow you to invest in real estate without the hassle of managing it include Fundrise, PeerStreet and Patch of Land.

Investment loans

Traditionally, banks granted these fixed-rate loans to help investors finance a specific project and acquire such assets as property, equipment or machinery. Today, investors will find direct lending options that include crowdfunding and peer-to-peer lending platforms.

Types of contracts

An advanced form of investing, contacts are agreements to buy or sell commodities, shares and assets.

These are agreements to buy or sell a specific quantity of a commodity at a specific price and on a specific date. Commodities traded on the futures market include metals, oil, grains, and animal and food products, like coffee and hogs.

Like commodity futures, these are legally binding agreements to buy or sell specific shares of an individual stock or a narrow-based security index at a future date.

A forward is a customized contract between two parties to buy or sell an asset at a specific price on a specific date in the future. Unlike standard futures contracts, forwards can be tailored to any commodity, amount or delivery date.

A swap is an agreement between two parties — like businesses and financial institutions — to exchange cash flows or liabilities for a set period of time.

A popular type of derivative trading, CFDs enable traders and investors to speculate on the rising and falling prices of global financial markets, such as stock, commodities and currencies. CFDs aren’t allowed in the US.

Currencies

Cryptocurrencies

Cryptocurrencies are digital assets that serve a variety of different purposes. There are over a thousand cryptocurrencies on the market, of which the best known are bitcoin and Ethereum.

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How to invest

Investing is accessible to anyone. The paths you can take to build a portfolio depend on your budget, risk tolerance and financial goals.

Investment accounts

Before signing up for an investment account, read the fine print. These accounts are typically taxable, and fees can vary.

Brokerage accounts. This is an arrangement between an investor and a licensed brokerage firm. As the investor, you deposit money into the brokerage account and then place orders to buy or sell such investments as stocks, bonds and mutual funds.

Digital apps. In recent years, fintech startups have launched apps that allow everyday earners to invest their money from their smart devices. These apps appeal to millennials and the tech-savvy, and they cut down on the fees you’d typically pay for a human to manage your money.

Retirement accounts

Look at retirement accounts as a way of investing and securing your financial future. They can help you to save for retirement and manage your income after you retire.

Employer-sponsored plans. With defined contribution plans like 401(k)s, 403(b)s and 457(b)s, you contribute pretax money from your paycheck to your individual account. The value of the account fluctuates over time, and on retirement, you’ll receive the balance. Many employers match your contributions, offering another incentive to save.

Federal government plans. Most federal employees participate in the Federal Employees’ Retirement System (FERS) or the Civil Service Retirement System (CSRS), which pays annuities monthly for the rest of your life after you retire. Employees in both systems can also opt into the Thrift Savings Plan (TSP), a defined contribution plan that operates like a 401(k).

Individual retirement accounts. With IRAs, you can contribute up to the limit determined by the IRS to save for retirement. IRAs include traditional, Roth IRAs and SIMPLE and SEP IRAs for the self-employed. They offer tax advantages. For example, you won’t pay taxes on your traditional IRA earnings until you retire.

Robo-advisors

Robo-advisors are exactly what they sound like: digital financial advisers. A robo-advisor relies on intricate algorithms and technology to offer financial advice, help with asset allocations and automate the management of your investments.

Financial advisers

If you prefer working with a human, you can enlist a financial planner or adviser to help you set up an investment portfolio. Most financial advisers work out of banks and require a minimum amount to invest.

Investing strategies

A good investment strategy addresses the opportunities and risks of the financial markets in a way that helps you achieve your goals. Such a strategy can change over time, but consider important components like:

Asset allocation

Divvy up your savings sensibly. This involves determining how much money to invest into each vehicle, often based on its volatility and your risk tolerance. The classic example is for younger investors to put more money into stocks than bonds to leverage long-term growth potential, while investors closer to retirement generally keep most of their investments in less risky bonds.

Cycles

Know what’s coming. Business cycles, economic cycles and seasons can influence the movements of investment vehicles. Restaurants must be planned, then built. Oil must be discovered, then drilled. Prescription drugs must be developed, then tested and approved.

Diversification

Don’t put all your eggs in one basket. To manage risk and protect against market fluctuations, savvy investors diversify their portfolios across multiple vehicles and sectors.

Trends

Keep your finger on the pulse of the economy. Recognize the role that generational, technological, societal and other shifts can play in the ongoing supply and demand tug of war.

Financial markets

To get money into your desired investment, you’ll need to access a market that offers that investment, often through an investment account that participates in the various markets.

You can invest your money through national and global exchanges that include:

Capital markets

As Wall Street’s best-known stock exchange and the world’s largest, it lists most traditional US companies, like General Electric, Bank of America, Ford and AT&T.

Founded as the National Association of Securities Dealers Automated Quotations in 1971, it’s second only to the NYSE and features many top technology companies, like Apple, Microsoft, Facebook and Netflix.

Founded as the mutual New York Curb Market Agency in 1908, it grew to become the American Stock Exchange (AMEX) before being acquired by the NYSE and rebranded as the NYSE American. It’s home to many small-cap stocks, especially precious metals mining companies like NexGen Energy, NovaGold Resources, Polymet Mining and Sandstorm Gold.

Various OTC markets, some traditionally called bulletin boards or pink sheets, allow investors to buy and sell through a broker rather than trading through an exchange, often when a stock or bond isn’t listed on a major exchange.

Derivatives markets

Focused on options and futures since 1898, the CME now includes the Chicago Board of Trade, the New York Mercantile Exchange and the Kansas City Board of Trade.

This modern energy futures exchange has grown quickly since 2000 to serve numerous commodity futures and options markets, as well as digital assets.

As the nation’s largest options exchange, CBOE offers contracts on some of the most popular indices, like the S&P 500, Dow Jones Industrial Average, NASDAQ Composite and Russell 2000.

Forex market

Bottom line

All investments are a dance of risk and reward. The aim of investing is to build wealth and set yourself up for a comfortable financial future. But it comes with a degree of uncertainty.

What you invest your money in and how you invest it should be guided by your goals and capital.

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